May 2016
For professional investors only
Schroders
Economic and Strategy Viewpoint
Keith Wade
Chief Economist
and Strategist
(44-20)7658 6296
Azad Zangana
Global: here we go again (page 2)


Senior European
Economist and
Strategist
(44-20)7658 2671
Craig Botham
Emerging Markets
Economist
(44-20)7658 2882
In what has become an annual ritual the International Monetary Fund (IMF) has
downgraded its forecasts for global growth. Markets have been unmoved as
growth expectations had already been marked down and, if anything, the outlook
has brightened with commodity prices and business surveys perking up.
However, whilst the IMF may have turned gloomy at the wrong moment there is
no escaping that this is the sixth consecutive year in which economists have had
to downgrade their forecasts for global growth. Hopes that the financial crisis
would only have a temporary effect have been dashed. The IMF calls for more
fiscal policy, but for countries with high public debts such as Japan the only
option may be monetisation. Is it time to start the helicopters?
Negative interest rates: opening Pandora’s box (page 7)



As growth and inflation continue to disappoint, central banks are under
increasing pressure to add further stimulus. Negative interest rate policy (NIRP)
is in fashion and so we discuss the benefits and costs of such unorthodox policy.
NIRP should in theory incentivise less savings and more consumption and
investment and is being heralded as a solution to secular stagnation where fiscal
policy has been exhausted. However, NIRP has its costs including creating
perverse incentives and hurting the profitability of banks. Its use to deter excess
foreign capital is legitimate, but to boost activity is highly questionable.
Our main concern is the removal of the zero lower bound with NIRP. If investors
become concerned about an economic or financial shock, they could cause yield
curves to invert, assuming central banks will cut interest rates further. This could
cause many to question the viability of banks, and potentially trigger a financial
crisis.
Emerging markets: Running the reform marathon (page 14)

Reforms can help drive idiosyncratic equity performance in emerging markets,
but the process is a marathon, not a sprint. We look at where four different
countries find themselves in the race.
Views at a glance (page 18)

A short summary of our main macro views and where we see the risks to the
world economy.
Chart: World GDP forecasts cut once more
Full year growth (%)
3.8
3.6
3.4
3.2
3.0
2.8
2.6
2.4
2.2
2010
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
2016
Source: Consensus Economics, Schroders Economics Group. 28 April 2016.
1
2016
May 2016
For professional investors only
Global: here we go again
“The good news is that the recovery continues: we have growth; we are
not in a crisis. The not-so-good news is that the recovery remains too
slow, too fragile, and risks to its durability are increasing.”
Christine Lagarde, Managing Director, IMF, 5 April 2016
IMF confirms
slowdown in
world economy
In what has become an annual ritual, the IMF downgraded its expectations for
global growth in its spring forecasts. On the IMF’s measures the world economy
is now expected to grow at 3.2% in 2016, down from 3.6% at the forecast made
in October last year. The forecasts set the backdrop for a gloomy set of IMF
meetings in Washington where countries were urged to increase co-operation
and do more to support growth through fiscal policy.
The IMF forecast is one of the most comprehensive assessments of the world
economy, however given the time it takes to produce it is often seen as a lagging
indicator. In this case it reflected the concerns of the first quarter which was
dominated by fears of a global recession. Markets received the news from the
IMF with equanimity as most economists had already downgraded their forecasts
in response to weaker growth in the US and Japan, and ongoing concerns over
the emerging markets and commodity prices.
If anything the outlook has brightened recently. Commodity prices have been
firmer: the oil price has rallied and industrial metals have shown signs of life.
There are indications that the manufacturing sector may now be turning a corner
having battled with the slowdown in global trade and an overhang of inventory.
Purchasing managers indices have firmed and the US Institute for Supply
Management (ISM) indices for both manufacturing and services turned up in
March (see chart 1).
Chart 1: ISM signals turn in the US cycle
Balance
65
q/q (annualised rate)
10%
8%
60
6%
4%
55
2%
50
0%
-2%
45
-4%
-6%
40
-8%
35
2001
-10%
2003
2005
NBER recessions
2007
2009
US GDP, rhs
2011
2013
2015
ISM manufacturing & services average
Source: Thomson Reuters Datastream, Schroders Economics Group, 29 April 2016.
However,
commodity
prices, surveys
and residual
seasonality point
to better growth
ahead
2
It is also likely that forecasters have been caught out yet again by the “Q1 effect”
in the US. This is the persistent tendency for GDP to be understated in the first
three months of the year as the statisticians at the Bureau for Economic Analysis
(BEA) struggle to fully account for the seasonal fluctuations in economic activity.
We estimate that the bias, formally known as residual seasonality, is currently
averaging around 1.5 percentage points off the annualised number. Given that
the US is the largest economy in the world, this accounts for a significant part of
the downgrade to global growth. The good news is that there is less bias in
subsequent quarters creating scope for a bounce back in Q2. The pattern of a
May 2016
For professional investors only
weak Q1 followed by a stronger Q2 has been a feature of the US data for the
past 30 years, but has become more pronounced since the financial crisis1
(chart 2).
Chart 2: First quarter blues in the US
Average quarter on quarter US real GDP growth rate (saar)
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Q1
Q2
Last 30 years
Q3
Q4
Last 5 years
Source: Thomson Reuters Datastream, Schroders Economics Group, 21 April 2016.
Bounce ahead, but the pattern of downgrades persists
These factors point toward a bounce back in growth in coming months led by a
firmer manufacturing sector. Such an outcome could make the IMF look out of
step by becoming more pessimistic just as the skies are clearing. However,
notwithstanding the prospects for a turn in the inventory cycle and the statistical
quirks of the BEA’s seasonal adjustment process, we cannot escape the fact that
2016 is set to be the sixth consecutive year in which economists have had to
substantially revise down their forecasts (see chart front page).
Forecasts have
been persistently
overoptimistic
on demand and
supply
Each year since 2011, the consensus for global growth has started at above 3%
and by the end of the year has fallen by around one percentage point to just
above 2%. This is a remarkably persistent error which has occurred against a
backdrop of lower and lower interest rates. This challenges the view that the
impact of the financial crisis would be temporary. Even the significant drop in oil
prices has not been enough to shake the world economy out of its torpor.
Putting aside doubts about economists’ ability to forecast, the explanation, in our
view, lies on both the demand and supply side of the economy. On the demand
side, credit availability has been tightened by regulation and potential borrowers
have been scarred by their past experience of debt. The increases in wealth
created by quantitative easing (QE) have added many lucky asset holders to the
rich list, but have not been spread wide enough to boost overall consumer
spending. Meanwhile, the export-led emerging markets are struggling to adjust to
weaker developed market demand and the related slowdown in China, which has
reduced global trade to a crawl and brought an end to the commodity boom.
On the supply side trend growth has ratcheted down, primarily reflecting the
deceleration in productivity growth in developed markets. Despite the
developments in technology in recent years we have not seen this translate into
higher output per worker. Meanwhile, demographics have turned less favourable
for growth as the baby boomers have begun to retire, thus slowing the growth in
the working population.
1
3
See the Schroders Talking Point article: "Is the US heading for recession?"
May 2016
For professional investors only
These are significant challenges and not all are a consequence of the financial
crisis. The demographics and productivity slowdown were in train before 2008,
for example.
Balance sheets
have been
repaired but little
desire on the
part of
households to
re-leverage
What has changed is on the demand side where the monetary transmission
channel has been permanently impaired as a consequence of the crisis. Earlier
in the recovery there was always the hope that once balance sheets had been
repaired and banks had been recapitalised we would see a revival in credit and
activity as borrowers took advantage of low interest rates. Seven years on and
this has not happened. Balance sheets have been repaired, but there seems to
be little desire to re-leverage.
Looking at the US, despite some strong growth in unsecured borrowing, overall
household borrowing remains weak and gearing (debt to income) continues to
decline. In the corporate sector gearing has picked up in the US but this would
seem to be part of a shift in the capital structure of firms to take advantage of the
low cost of credit relative to equity. Hence we continue to see companies issuing
debt and buying back their shares, rather than increasing their capital
expenditure. As a consequence the increase in leverage is not associated with
stronger growth. Meanwhile, gearing in the public sector remains high and
seemingly stuck at around 100% GDP (chart 3).
Chart 3: US household sector continues to de-lever
% of GDP
110
100
90
80
70
60
50
40
30
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Recession
Households
Government (Federal, State & Local)
Nonfinancials Businesses
2015
Source: Thomson Datastream, Schroders Economics Group. 25 April 2016.
Government
debts remain
high, or are
increasing
The picture is similar elsewhere with a household sector unwilling or unable to
gear up, whilst public sector debt remains high or is increasing. Such an outcome
is not confined to the developed economies, the fiscal position in the emerging
economies has deteriorated significantly as a result of the drop in commodity
prices. According to the IMF, in the Middle East and North Africa, the cumulative
fiscal balances of oil exporters alone are expected to deteriorate by over $2
trillion in the next five years relative to 2004–08, when oil prices peaked.
Time to fire up the helicopters?
This suggests that after a short term bounce we will be back to slow growth. We
are not forecasting a global recession, China hard landing or US recession.
However, efforts to boost activity with monetary policy will have little success as
the monetary transmission channels through credit and wealth effects remain
blocked. Meanwhile, the supply side has deteriorated creating the “wobbly bike”
world economy (in other words, slow moving and vulnerable to shocks).
Clearly, looking at the economists’ pitiful forecast record over the past six years
there is an adjustment of expectations which still needs to occur to a world of
4
May 2016
For professional investors only
slower growth. Bond markets recognise this and, more contentiously, equity
markets do too given the size of risk premia and the outperformance of income
generating shares.
However, low growth is a serious problem for politicians and governments who
have made promises on taxes and expenditure based on a world where growth is
stronger. They are now caught between the need for austerity to control
borrowing and fiscal expansion to boost growth.
Japan: fiscal
stimulus on its
way despite
unsustainable
public debt
Nowhere is this more acute than in Japan where government debt continues to
rise and the budget deficit remains high. Japan ran a budget deficit of 5% of GDP
last year, most of which was structural and outstanding public debt to GDP was
230%. And yet, despite the need for fiscal consolidation, the government is
widely expected to deliver a stimulus budget ahead of the upper house elections
in July and postpone the future increase in the consumption tax. The economy is
weak and inflation expectations continue to soften, so stimulus is on its way.
Chart 4: Japan’s debt mountain and QQE
% of GDP
250
200
150
100
50
0
00
01
02
03
04
05
06
07
08
Bank of Japan balance sheet size (3mav)
09
10
11
12
13
14
15
General government gross debt
Source: Schroders, Thomson Datastream, Oxford Economics 25 April 2016. QQE stands for
quantitative and qualitative easing
On the monetary side, the Bank of Japan (BoJ) chose not to increase stimulus
efforts on the 27 April against market expectations. The inaction came despite
the central bank pushing back the timing for hitting its 2% inflation target to
“during fiscal year 2017”, compared to the first half of that year previously, and a
downgrading of its growth outlook.
The road to
monetisation?
However, that does not mean that the BoJ will stop trying and we expect it to add
further stimulus by the end of this year. It is committed to beating deflation and
getting inflation back to 2%. The BoJ has already acquired assets of JPY 405
trillion and this will rise considerably further.
Some say this can only end in inflation which may happen if the BoJ starts to
feed printed money directly into the economy. This could be a “helicopter drop” of
newly created JPY into personal bank accounts and would amount to
monetisation, government spending with no increase in liabilities. It is widely
seen as the road to ruin as such measures have often ended in hyperinflation.
We would not rule this out, but monetisation may arrive through a different route.
The BoJ owns increasing amounts of the government’s debt and institutional
investors are being actively discouraged from holding Japanese government
bonds (JGBs). The scene is set for a consolidation of the government balance
sheet where the government writes off a large chunk of the BoJ’s holdings of
JGBs, or switches them into an ultra long dated zero coupon bond. Such a
restructuring would be a default, but it is a default on its own bank. Japan would
5
May 2016
For professional investors only
be downgraded by the ratings agencies, but the impact on yields and future
borrowing costs can be contained by further QE, or by forcing domestic investors
into bonds through capital controls, an extreme example of financial repression.
Nonetheless, the JPY could well fall sharply as international investors take fright
as debt will have been effectively monetised. The money originally printed to buy
bonds will remain in the economy, now backed by only the flimsiest promise to
withdraw it at some very distant date in the future.
Clearly we are some way from this and no other economies face quite the same
challenges. Yet, such musings indicate where QE may end up if growth does not
improve. As the European Central Bank (ECB) pushes its own QE programme
further out and widens the range of its asset purchases, what is happening in
Japan may be seen as increasingly relevant.
6
May 2016
For professional investors only
Negative interest rates: opening Pandora’s box
Negative interest
rates are now in
vogue amongst
central banks…
The spectre of mediocre growth and low inflation still haunts many advanced
economies years after the end of the global financial crisis. Central banks
resorted to extreme policies including ultra-low interest rates, quantitative easing
and funding for lending to name but a few. In recent years, a number of
European central banks have resorted to negative interest rates, largely in an
attempt to fend off unwanted international capital flows that threatened to cause
their currencies to appreciate. Now that major central banks like the BoJ and the
ECB have moved in this direction, we explore some of the unintended
consequences.
How can negative interest rates help?
Economists tend to have less of a problem coping with the theory of negative
interest rates than investors, but that is because they are used to looking at
negative real interest rates (policy rates minus inflation). For many, negative
nominal interest rates are a simple extension of recent easy policy, and for
some, an important policy tool to cope with secular stagnation - a state of the
world in which demand is deficient given the prevailing level of real interest rates.
Although the world is beginning to look like it is falling into secular stagnation, it
is not yet confirmed.
…and are being
heralded as the
solution to
secular
stagnation where
fiscal policy is
exhausted
The usual prescription for secular stagnation touted by the likes of Larry
Summers2 is fiscal stimulus, but given that most of the world has exhausted this
policy when responding to the global financial crisis, negative interest rate policy
(NIRP) has increasingly been proposed as the solution for weak growth.
Moreover, falls in inflation rates across the world have caused real interest rates
to rise, effectively tightening monetary policy. In some countries like Spain and
Greece, low inflation has turned into deflation, pushing interest rates in real
terms back in to positive territory. In order to reduce real rates, nominal interest
rates must therefore fall into negative territory.
NIRP effectively puts a charge on deposits encouraging financial institutions to
either lend funds or buy assets. Lending funds instead of holding them on
deposit with the central bank should lead to increased private investment and
consumption, therefore increasing aggregate demand in an economy. This is
often done with leverage in the banking system known as the financial or money
multiplier, and can be a very powerful stimulant. Purchases of assets on the
other hand are likely to be in the form of government and corporate bonds.
These lower the yields on such instruments and eventually translate into lower
borrowing costs including for mortgages. In addition, if banks pass on the cost of
negative interest rates to customers, it also encourages a reduction in savings,
potentially in favour of additional spending and investment.
Negative rates
were initially
used to
discourage
excessive capital
from overseas…
The initial use of NIRP was largely to discourage capital inflows in order to halt
currency appreciation. Switzerland, Denmark and Sweden continue to employ
negative rates in an attempt to maintain their competitiveness, particularly
against Eurozone countries. The Danish National Bank currently has its deposit
rate at -0.65%, while the Swedish Riksbank has a repo rate of -0.5%. However,
the most negative rate is being maintained by the Swiss National Bank (SNB),
with a target range of -1.25% to -0.25%. Use of NIRP for this purpose is nothing
new. The SNB used similar measures in the 1970s in an attempt to deter
investors looking to escape high inflation currencies elsewhere.
The impact of NIRP on foreign capital and therefore the currency would be
welcomed by the BoJ and the ECB, although both are primarily focused on
boosting activity through lending and credit creation. In Europe, where negative
deposit rates have been in place since the middle of 2014, there has been an
2
7
Lawrence H. Summers is the Charles W. Eliot University Professor and President Emeritus at Harvard University.
May 2016
…but the ECB
and BoJ are now
using it to boost
activity and
lending.
For professional investors only
increase in lending, and falls in interest rates charged by banks to corporates
and households. However, it is worth mentioning that the banking system was
largely impaired by the ECB’s asset quality review up until the end of 2014,
which is probably a more important explanatory factor behind the recovery in
lending. Moreover, the ECB started outright quantitative easing, which is also
likely to have lowered yields, particularly in riskier peripheral Europe. Indeed, this
is where we have seen the biggest falls in interest rates charged by banks. In
Japan, negative rates were only introduced in January, but it is fair to say that
most investors and the BoJ itself have been surprised by the impact so far.
Questions over the use of negative rates
As discussed in the first section of this publication, Japan may need to either
resort to helicopter money or monetise its public debt in order to boost growth.
This is the conclusion after the trade weighted Japanese yen appreciated by
7.1% since the BoJ cut its main policy interest rate to -0.1% on the 27th of
January. Similarly, a hot topic in Europe has been the appreciation of the tradeweighted euro since December 2015, when the ECB not only cut its negative
deposit rate further to -0.3%, but also extended its QE programme by 6 months
(effectively adding €360 billion). The euro also continued to appreciate after the
ECB cut the deposit rate to -0.4% in March, along with increasing monthly
purchases by a third, adding non-financial corporate bonds to the list of eligible
assets, and providing new targeted long-term refinancing operations (TLTROs)
or cheap loans to banks (chart 5).
Chart 5: Monetary easing fails to halt the rise of the yen and euro
Despite the use
of negative
interest rates in
Japan and the
Eurozone, both
have seen their
currencies
appreciate…
Index (01/06/2015 = 100)
116
BoJ cuts
main policy
rate to
-0.1%
114
112
ECB cuts
depo rate to
-0.3% and
extends QE
6 months
110
108
106
104
102
ECB cuts depo
rate to -0.4%,
increases QE &
new TLTROs
100
98
96
Jun 15
Aug 15
Oct 15
Dec 15
Japanese Yen effective exchange rate
Feb 16
Apr 16
Euro effective exchange rate
Source: Thomson Datastream, Schroders Economics Group. 28 April 2016.
…suggesting
more stimulus is
likely.
If both the ECB and BoJ continue to see their currencies appreciate, it is quite
likely they will continue to resort to more of the same policy mix: more QE and
even more negative interest rates. But what is the limit? When will they have to
start preparing the helicopters? In Japan, it may not be so far away, but in
Europe, we would argue that policy is loose enough, and that the additional
easing implemented in the last six months will have almost no economic impact.
We suspect the ECB may ease a little further, but its willingness to act is nearing
its limits.
If the ECB’s recent stimulus is ineffective, why is it bothering? It partly comes
down to maintaining confidence in the power of monetary policy and the hope of
a recovery, but also due to the ECB’s legal obligation to do everything it can
within its mandate to return inflation back to close to, but below, 2% within a twoyear horizon. As growth and inflation have disappointed over the past year
relative to the ECB’s forecast, the governing council has been forced to add
8
May 2016
For professional investors only
additional policy stimulus. Other central banks like the Bank of England and
Federal Reserve were less constrained in their mandate, and were able to wait
for inflation to recover more slowly, as slack was taken out of the economy.
Europe is on the same path, but we think about two years behind. Nevertheless,
the need to persistently prove to markets and the public that the ECB is doing
“whatever it takes” reinforces the idea that more easing could follow, especially if
an unexpected economic shock was to hit sentiment. The idea of further easing
could in itself be damaging as we will discuss later on.
Why negative interest rates may be counter-productive
Negative interest
rate policy is not
a cost-free policy
tool
NIRP is not a cost-free policy tool. There are serious consequences from
distorting economies in this way, and potentially even greater consequences
from a behavioural finance point of view.
It encourages
households to
withdraw cash…
Similarly, other perverse incentives arise. There is also growing evidence that
more households are investing in safes for storing cash. Another drawback of
NIRP is the incentive to withdraw assets from financial institutions, and instead
store them elsewhere. This can slowly lead to the disintermediation of banking,
leading to less efficient allocations of capital. This applies to corporates too
which, if large enough, can easily move assets overseas. While this could help
depreciate a currency, which in turn could help growth, it has to be balanced
against the withdrawal of capital, which banks would have used to lend for
investment purposes (with additional leverage as discussed earlier). The net
growth effect is ambiguous at best, but the net credit effect would be negative.
Starting with the practicality of NIRP, the Federal Reserve has in the past
questioned whether commercial banks would even have the ability to process
NIRP due to the restrictions on their computer software. The evidence so far is
that banks have sidestepped this problem by introducing new banking fees to
cover the cost of negative interest rates (rather than actually charging customers
a negative rate). However, European banks appear to have only done this for
corporate customers, but not for retail customers. Where competition is fierce for
retail customers, no bank wants to be the first mover in introducing such fees for
fear of losing customers, who not only have deposits with their banks, but often
mortgages. Instead, banks appear to be taking the hit on their profits. Naturally,
this limits the effectiveness of NIRP in persuading savers to spend.
At its extreme, negative interest rates could also apply to loans, whereby the
borrower pays back less than initially borrowed. This has only happened in
Switzerland where banks have been able to use a more negative funding
structure including very large charges on deposits to allow mortgage borrowers
to enjoy negative interest rates. Swiss banks can do this as most depositors are
not sensitive to charges, but we believe this would be totally unsustainable for
most banks in other more rational jurisdictions.
Interestingly, the ECB is attempting to ease the burden on banks with the offer of
its new TLTROs, which do offer negative interest rate loans for banks, with the
hope that banks can then use the additional funding to lend at an even lower
rate, or even at negative rates. However, the key point that the ECB misses is
that if a borrower has the option to borrow at negative rates, he or she will do so
and make a risk free profit without making an investment. If an investment
opportunity arises with expected positive returns, then it makes sense, but
presumably if the economy is in secular stagnation, and zero-rates were not
sufficient to boost investment, then negative rates are probably not sufficient
either, especially in a deflationary environment. A good example of this is
Sweden where negative rates have helped boost consumer spending and
caused house prices to arguably enter bubble territory, but business investment
remains weak, due to concerns over the sustainability of demand in the
economy. This is also why European banks suggest that they will not be taking
up much of the new TLTRO loans. Funding and liquidity is plentiful, while
9
May 2016
For professional investors only
demand for new credit is too low to warrant taking the loans from the ECB.
So far, with the exception of Switzerland, there are no signs of households or
corporates being able to enjoy negative rate loans. Banks still need to charge a
premium compared to the interest rate they pay for deposits as the basic
banking business model. Not being able to charge for deposits puts banks’
profitability under strain, but not being able to increase the loan premium is a
double hit to their net interest margins.
…and hurts
banks’ profits as
negative rates are
not fully passed
on to customers
The most common mortgage type across Europe is a long-term fixed interest
rate mortgage. In these countries, existing mortgage holders do not benefit from
cuts to interest rates or NIRP. However in some countries, notably Spain, Italy
and Portugal, most of the mortgages have variable interest rates, mostly linked
to the inter-bank rate (EURIBOR). These borrowers have seen their mortgage
rates fall (through lower EURIBOR), although as the rate also includes a
premium for the banks (between 1 – 1.5%), they continue to pay a positive
interest rate overall. What complicates matters is that the spread/premium that
banks charge over EURIBOR within the mortgage rate is fixed on existing
mortgages. Therefore, if the ECB was to cut interest rates down to say -1.5%, it
would make almost all existing mortgages unprofitable in these countries (as
funding costs have not fallen). New loans would be re-priced with a higher
premium, but they would be small in size compared to the huge existing loan
books.
A further complication is that part of banks’ net interest margins come from
interest earned from bonds they hold as part of their capital base (assets). As
interest rates are cut and QE is implemented etc., the yields on these bonds are
depressed, reducing the income that banks can state. Of course, banks also
gain from the price of these bonds rising (there is an inverse relationship
between yields and prices of bonds), but only by boosting the net asset value of
banks through the marked to market system of bonds set aside as available for
sale (AfS) – which is the majority of bonds. They would also give up the future
stream of coupons (interest) if those gains are ever crystallised through the sale
of those bonds. Therefore, NIRP and falling yields generally lower banking
profitability further from the asset side.
The extent of the impact on overall banking profitability will depend on the
proportion of profits derived from net interest income. Investment banks for
example are less impacted by NIRP as they have other sources of revenues.
Chart 6 (next page) shows how reliant banks are on net interest margins as a
share of total 2016 expected revenues along the horizontal axis, and the
contribution of income from bond holdings as a share of total 2015 net interest
income on the vertical axis. Observations to the right of the chart represent major
listed banks most vulnerable to falling interest rates, while to the top of the chart,
those vulnerable to the falling yields. The chart highlights the geographic
locations of the most vulnerable as being mostly in peripheral Europe, but also
the most resilient, which are mostly investment banks in Switzerland.
10
May 2016
For professional investors only
Chart 6: Banks’ vulnerability to falling interest rates
Peripheral banks
are most
vulnerable to
falling and
negative rates
due to their high
reliance on net
interest income
AfS and HTM bond contribution to 2015 net interest income
60%
50%
40%
30%
20%
10%
0%
10%
UK
20%
Ire
Dan
30%
40%
50%
60%
70%
Net interest income as % 2016(e) revenues
Swe
Nor
Fra
Ger
Neth
Bel
Aus
80%
Swi
90%
Spa
Ita
Source: Schroders European Equities team and Economics Group. 28 April 2016.
Given the above analysis on the impact on banks, it is therefore not a surprise to
see banking equities underperform the wider market as rates have fallen into
negative territory. In Japan, the TOPIX banking index has underperformed the
wider market by 15.6% since the start of the year, with most of that
underperformance coming just after the BoJ introduced NIRP (chart 7). In
Europe, as NIRP has been in place since the middle of 2014, the
underperformance of banks has been greater. The Dow Jones EuroSTOXX 600
banks index has underperformed the wider EuroSTOXX 600 index by 30%
(chart 8).
Charts 7 & 8: Underperformance of Japanese and European banking
equities
Negative interest
rates have
coincided with a
severe
underperformance
of banking stocks
Index (1/1/2016 = 100)
100
95
90
85
80
75
70
65
60
55
50
45
40
Jan 16 Feb 16 Mar 16 Apr 16
TOPIX Banks price index
TOPIX price index
1.00%
0.90%
0.80%
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
-0.10%
-0.20%
Index (1/5/2014 = 100)
130
1.6%
120
1.4%
110
1.2%
100
1.0%
90
0.8%
80
0.6%
70
0.4%
60
0.2%
50
0.0%
40
-0.2%
30
-0.4%
20
May 14
-0.6%
Nov 14 May 15 Nov 15
DJ EUROSTOXX banks index
DJ EUROSTOXX 600 index
Source: Thomson Datastream, Schroders Economics Group. 28 April 2016.
Crucial yield curves
Steeper yield
curves help
banking profits…
11
The shape or steepness of the yield curve (from government bonds) is also
important for banks as it indirectly determines the premium they can charge for
transforming short-term deposits into long-term loans. Generally, steep yield
curves boost banking profits, while flat curves reduce earnings. Usually, the
shape of the curve is determined by a combination of expectations of future
interest rates, an inflation premium plus a term premium. Normally, the curve is
upward sloping, but it can invert, especially when markets begin to forecast cuts
May 2016
For professional investors only
in interest rates, which usually occurs as a recession is unfolding.
Clearly, an inverted yield curve is very costly for banks, but they are more
common than many believe. In fact, the UK yield curve has been inverted (10year point compared to policy rates) 17% of the time since 1980 using monthly
data. Fortunately for banks, inverted curves usually reverse back to their normal
shape once central banks start to cut interest rates, and once investors can be
confident that the economy will recover and inflation will rise again. A recent
example of this was the recession of 2008/09 during the global financial crisis.
As chart 9 shows, the German yield curve inverted during this period more than
once, just as most curves did at the time.
Could we see yield curves inverted again? The reason we highlight the German
curve is that it, along with most European curves, did not invert in 2012, despite
the European sovereign debt crisis and recession. This is because most
investors believed that the ECB was near its lower bound with interest rates, and
so curve inversion made no sense. However, now that the zero lower bound has
been removed, we are concerned by the consequences for yield curves, and by
extension banks’ profitability and wider financial stability.
Chart 9: German yield curve inverts during the global financial crisis
…which are hit
during times of
recession when
curves invert.
Spread (%)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
04
05
06
07
08
09
EZ sovereign debt crisis recession
10
11
12
13
14
15
16
Global financial crisis recession
10yr bund yield minus 3m OIS rate
Source: Thomson Datastream, Schroders Economics Group. 25 April 2016.
Pandora’s box
If investors start
to worry about
another
recession, then
the removal of
the zero lower
bound could
invert curves
again, like in
Japan…
12
If in the near future investors and economists start to worry about a severe
shock, such as a US recession, China hard landing or similar negative scenario
for growth and inflation, we would expect fixed income markets to move to price
in additional monetary stimulus. More QE would be likely but what about more
negative interest rates? Our analysis suggests that central banks are probably
close to the limit of how far they can push NIRP, but if misunderstood by
markets, then fixed income investors could easily push yield curves to be
inverted again. Indeed, with the recent sharp appreciation in the Japanese yen,
investors in Japanese government bonds did just that. The curve inverted for the
best part of March and April, as investors appeared to signal that the BoJ’s
current policy was insufficient, and that further cuts would be required. The BoJ
opted not to oblige markets in their April meeting, despite the majority of
economists surveyed for the Bloomberg consensus expecting further action.
May 2016
For professional investors only
Chart 10: Japanese curve inverts as yen surges
10yr minus 3m spread (%)
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
Jan 14
Apr 14
Jul 14
Oct 14
Jan 15
Germany
Apr 15
Jul 15
Oct 15
Jan 16
Apr 16
Japan
Source: Thomson Datastream, Schroders Economics Group. 25 April 2016.
...which could
prompt concerns
over banks’
profitability and
even trigger a
financial crisis.
Even if central banks do not cut interest rates much more than they already
have, the prolonged presence of an inverted yield curve could lead to investors
questioning the future viability of many banks, especially those in peripheral
Europe for the reasons set out earlier. Banking equities would plunge with
negative consequences for the functioning of financial markets. Suddenly, it
could quickly feel like September 2008, just after the collapse of Lehman
Brothers.
Conclusions
NIRP has been successfully used to deter foreign capital in order to reduce
currency appreciation, but a cleaner solution would be akin to Brazil’s financial
operations tax, which taxed foreign investors 6% of their holdings at its peak,
before being cut in 2013 when capital started to flow in the other direction.
There are some justifications for negative interest rates, but we believe the costs
outweigh the benefits, especially when being used to stimulate activity. Not only
does NIRP introduce perverse incentives, but it hurts the banking system, which
in turn can reduce lending and competition in the long term.
Central banks
should spell out
the limitations of
negative rates,
before markets
get ahead of
themselves
13
However, our big concern is the potential for the market to over react, and
assume much deeper cuts into negative territory if investors start to worry about
an adverse economic or financial shock. This could cause the yield curve to
invert and prompt a loss in confidence in the viability of banks, potentially
triggering runs on banks and a financial crisis. Closure of banks would also
reduce competition in the industry in the long-term.
Our advice for central banks is to clearly stipulate the new lower bound on
interest rates in order to head off misguided sentiment. Mario Draghi can
continue to promise to do “whatever it takes”, as long as that does not suggest
deeply negative interest rates at the expense of the banking system.
May 2016
For professional investors only
Emerging markets: Running the reform marathon
Reforms can drive
strong equity
performance…
We wrote last month of the outlook for emerging market (EM) assets, particularly
equities, and argued that investing in EM would increasingly require a
differentiated approach in the absence of a global recovery. We also said that
one factor which could help drive returns was serious reform. But economic
reforms, essentially an attempt to provide a fundamental fix to an economy,
rarely lend themselves to a rapid turnaround. To borrow a clichéd sporting
metaphor, (with the excuse of April’s London marathon fresh in our minds),
reforms are a marathon, not a sprint. Some economies are further along the race
course than others, but will they all follow the same track?
Indonesia, the next India?
Just as the election of Narendra Modi prompted reform hopes in India, the
election of Joko Widodo (“Jokowi”) generated optimism of a turnaround in
Indonesian policy. This was reflected strongly in equity market performance, but
Indonesian expectations soon faltered as Jokowi encountered political problems
both within his own party and also more generally as head of a minority
government. A lack of support for reforms seemed to scupper the chance for
change just months into Jokowi’s term.
In India, by contrast, Prime Minister Modi took power as head of a majority
government (at least in the Lower House) and a reasonably united party. As we
wrote after visiting India in February of last year, although “Big Bang” reforms
were absent, the business environment had improved markedly, and smaller
reforms were being enacted. Corporates, at that point, were also willing to give
the government more time, confident that the desired reforms would be
implemented.
Chart 11: Equity performance in India and Indonesia impacted by politics
…but
disappointments
can reverse some
of these gains
Index (May 2013 = 100)
160
150
140
Modi-mania
130
Reform
disappointments
120
110
100
90
Jokowi jubilation
more modest
80
Cabinet
reshuffle
70
60
Apr 13
Oct 13
Apr 14
Oct 14
Jakarta Composite
Apr 15
Oct 15
Apr 16
Nifty 500
Source: Thomson Datastream, Schroders Economics Group. 28 April 2016.
Over a year later, and much has changed. Reform momentum in India has
suffered a series of blows, and investors have lost patience. Some of the most
hoped for reforms, such as land acquisition, appear to have been abandoned
altogether, or else left to piecemeal reform at a state level, as in the case of the
labour market. Meanwhile, a cabinet reshuffle in August last year saw an
improvement in the political trajectory in Indonesia, establishing a more proreform cabinet. Momentum built further in January this year with the news that
the second largest political party would lend support to the government, giving it
the majority needed to pass legislation. Chart 11 (above) shows these political
twists and turns reflected in the equity market performance.
14
May 2016
Infrastructure
needs in
Indonesia, as in
India, are high
For professional investors only
As in India, there has been a big push to boost investment through reform efforts
aimed at encouraging private sector involvement. But also, as in India, most of
the increase we have seen to date has come via government spending. This
increase is not necessarily a bad thing; at 3.25% of GDP on average between
2011 – 14, Indonesian government capital expenditure was lower than most EM
peers, including India. Given a sizeable infrastructure gap - logistics costs are
amongst the highest in Asia (as anyone visiting Jakarta will confirm), according to
the IMF, and electricity production is also far below the EM average – the
government’s plan to spend $480 billion on infrastructure investment between
2015-19 is to be welcomed. Again though, to draw a parallel with India, the
problem lies not with the intention, but with the execution.
Of the $480 billion target, the public sector is to provide two-thirds of the total
investment, with the rest to come from the private sector, chiefly via publicprivate partnerships (PPP). While the government can meet its share of
infrastructure spending (though optimistic revenue assumptions will probably
mean we see spending cuts elsewhere), it is less certain that PPP uptake will be
sufficient. A number of reform packages have been announced to boost private
investment, including land acquisition reform (an achievement which has eluded
Indian Prime Minister Modi), but nationalism remains a strong theme in
Indonesia. It is not alone in this (the same is true in India) but as in India we fear
that this will prove inimical to foreign investment. For example, a reform package
in February reduced foreign ownership restrictions on 59 industries, but
increased them in 19. This sends a confused policy message and creates
uncertainty. In other areas, the government has announced intentions to reduce
non-tariff measures and red tape, but made little to no progress. There has also
been an increase in government intervention, notably in the banking sector.
Again, this does little to encourage investment, and so we suspect private sector
investment may perform less strongly than hoped.
Spending
increases for
infrastructure
provide
fundamental
equity support
Still, we expect the government to largely deliver on its infrastructure plan, which
is positive for a number of reasons. Infrastructure investment will deliver growth,
lower inflation through reduced logistics costs and has potential to “crowd in”
foreign direct investment (FDI) because of improved distribution networks. This is
a positive story for trend growth and so probably justifies much of the modest bull
run in Indonesian equities since August of last year. There will inevitably be some
disappointment, as in India, when the private sector investment does not
materialise, but to us Indonesia’s gains look to have fundamental support.
Meanwhile, India’s reform story continues to struggle. There are local elections in
May which could shift the balance of power somewhat in the Indian Upper
House, and this is the next signal for us to watch. A favourable result for the
ruling party (essentially, a loss of seats by the opposition Congress party) boosts
the chances of reforms this summer. Absent this, we would be sorely tempted to
write off the prospect of further substantial reforms under Modi. We should still
see incremental gains, and the recapitalisation of the banking sector will prove
helpful to cyclical growth, but reform failure could prove damaging to
performance in a still crowded market.
South Africa, the next Brazil?
India and Indonesia, though they have problems, do at least have some political
certainty. Lagging behind them somewhat on the reform path are Brazil and
South Africa, both currently preoccupied with political turmoil and so distracted
from the task of economic reform. We have written copiously on Brazil since a
research trip to the country in March, and will refrain from duplicating that work in
its entirety here. But a potted summary of the story so far is that markets have
gyrated wildly in line with the political drama, driven by hopes that Dilma is
removed as president and replaced by a more pro-reform government. Given a
vote in favour of impeachment by the Congress, and a likely matching vote by
15
May 2016
For professional investors only
the Senate in May, this now looks to be a highly likely scenario. As we have said
before, our expectation is that a new, “national unity” government enacts
sufficient reform to address the fiscal problems plaguing Brazil, but then does
little more ahead of the 2018 elections. This is a positive outcome compared to
continued political gridlock, but is a clear ‘second best’ outcome compared to
more wide ranging reforms of labour and product markets, and an overhaul of
infrastructure. Markets may sour when this becomes apparent, but for now
sentiment is buoyed by the prospect of a turnaround.
Conditioned by Brazil to expect great things from impeachment, market attention
has been garnered by the political scandal in South Africa. As in Brazil, there are
accusations of presidential corruption, though the sums involved are smaller. As
part of security improvements to President Zuma’s private residence, Nkandla,
totalling $23 million, a swimming pool was constructed, supposedly as a security
feature for “firefighting purposes”. However, the country’s Constitutional Court
has since ruled that Zuma failed to uphold the constitution, and must repay some
of the costs of the “upgrades”.
Less likely to see
the back of Zuma
than of Rousseff
This ruling has weakened the President (chart 12) and prompted some
speculation of possible impeachment or resignation. Impeachment though looks
very unlikely given the ruling African National Congress’ majority in Parliament,
and the requirement for a two thirds majority vote for impeachment. Even though
Zuma does not enjoy unqualified ANC support, he retains enough backers for
now that this is a very low probability event. Slightly more plausible is a recall or
resignation scenario. If the Nkandla ruling (and allegations of “state capture” by
wealthy and connected individuals) proves highly deleterious to the ANC’s
performance in August’s municipal elections, party pressure for his resignation is
likely to build, if not an ANC led vote of no confidence in Parliament.
Chart 12: Nkandla has weakened President Zuma
"Where is the country going?" (%)
How likely to trust president Zuma (%)
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
May-15
Nov-15
Mar-16
Right direction
Wrong direction
Don't know
Mar-16,
ANC only
May-15
Mar-16
Mar-16, ANC
only
Extremely / Very likely
Neither likely nor unlikely
Not at all / not very likely
Don't know
Source: IPSOS South Africa, Schroders Economics Group. 28 April 2016.
Some reforms on
the cards, but
lower likelihood
than in Brazil
16
For a Brazilian style rally to be warranted by these developments, we need some
prospect of reforms, either to be implemented by a post-Zuma government, or
under Zuma, spurred by falling support. The good news is that, unlike Brazil,
policy has been reasonably sensible; currency weakness was permitted in
response to external shocks, monetary policy has been tight, and fiscal policy
has also become tighter. Though the sacking of Finance Minister Nhlanhla Nene
did much to undermine fiscal credibility, the ultimate appointment of Pravin
Gordhan has steadied the ship. There has also been a policy response to market
conditions since the start of the year, with closer interaction between the
government and private sector on needed reforms. A number of promises were
made in February’s State of the Union address, but as we know from Brazil, part
of the reform marathon comes from the painful progress of intentions to
execution, with Brazil falling down spectacularly on this front under Dilma
May 2016
For professional investors only
Rousseff. Ominously, reform details and timelines are conspicuous by their
absence, generating doubts over government commitment. These doubts are
reinforced by clashes between the Finance Ministry and other government
officials, and existing less market-friendly state policy.
What could catalyse reform? It may be that the Nkandla-related furore has
distracted government from reform efforts, and that we will see more progress
now that Zuma is set to repay the costs associated with the security upgrades.
Alternatively, we may see policy inertia until the August election results, with a
risk that if the ANC vote share holds up, Zuma feels vindicated in doing little.
Conversely, we could see Zuma removed by the ANC on the back of poor results
and replaced with a more reformist government, but it is not immediately
apparent to us that the ANC would move in this direction. It is also possible they
drift left, to regain vote share from the Economic Freedom Fighters, and the
support of the unions.
Chart 13: Things could always be worse
Reform outlook
might be dimmer,
but economy is
still outperforming
Brazil’s
%
15
10
5
0
-5
-10
-15
South
Africa
Brazil
Manuf. production
(y/y)
South
Africa
Brazil
Retail sales (y/y)
South
Africa
Brazil
Inflation (y/y)
South
Africa
Brazil
Fiscal deficit
Source: Thomson Datastream, Bloomberg, Schroders Economics Group. 28 April 2016. All
data for February 2016 (latest available), except for fiscal deficit which is for Q4 2015.
All of this means that South Africa is quite likely to follow Brazil’s earlier footsteps
in losing its investment grade rating - probably not the example investors were
hoping they would emulate. S&P and Fitch will conduct their ratings reviews in
June, and Moody’s recently placed the country’s rating on review. All three
currently have the country at one or two notches above investment grade. A
downgrade to sub-investment grade seems entirely possible given slowing
growth, a series of large deficits, and a significant increase in debt levels - though
all these metrics are still better than Brazil’s (chart 13). If we were to speculate
over the ratings agencies’ intentions, they may decide to wait until after the
August elections to downgrade, providing one last chance for policy intentions to
move forward to execution. Consequently, the June review might provide a spur
to policymakers to begin enacting some of the promised reforms, although this
might be too optimistic. If they do not, and Zuma clings to power, a downgrade
seems certain.
17
May 2016
For professional investors only
Schroder Economics Group: Views at a glance
Macro summary – May 2016
Key points
Baseline

We trimmed our global growth forecast in February to 2.4% for 2016 led by downgrades to the US, Japan
and emerging markets. The inflation forecast for 2016 was also reduced for the advanced economies to
reflect the lower oil price profile. Emerging market inflation is, however, higher as a result of currency
depreciation and administered price hikes. For 2017, our forecasts were little changed, with growth
strengthening modestly as a result of more stable emerging market activity.
The US Fed is expected to raise rates in June and December by 25 bps, so taking fed funds to 1% by end
year. Further increases in 2017 to 1.5% by end year, but this is a flatter profile than before to reflect lower
inflation and concerns about global activity.
UK recovery to continue, but to moderate as a result of Brexit uncertainty and the resumption of austerity.
Interest rate normalisation to begin with first rate rise in November 2016. BoE to move cautiously, hiking
25bps in November, peaking at around 1% in February 2017 when weaker activity will force a pause.
Eurozone recovery continues in 2016, but does not accelerate as tailwinds fade and the external
environment drags on growth. Inflation to turn positive again in 2016 and rise modestly into 2017. ECB to
cut rates further with the deposit rate falling to -0.5% by the end of the year where it stays through 2017.
Japanese growth now forecast at 0.8% this year (previously 1.1%) and inflation reduced to 0.4%. The BoJ
responds with further rate cuts, taking policy rates to -0.25% by end 2016.
Emerging economies benefit from modest advanced economy growth, but tighter US monetary policy
weighs on activity, while commodity weakness will continue to hinder big producers. Concerns over
China’s growth to persist, further fiscal support and easing from the PBoC is expected.





Risks

Risks skewed towards deflation on fears of China hard landing, currency wars and a US recession. The
risk that Fed rate hikes lead to widespread EM defaults would also push the world economy in a
deflationary direction. Inflationary risks stem from a significant wage acceleration in the US, or a global
push toward reflation by policymakers. Finally, an agreement between Saudi Arabia and Russia could limit
oil supply, leading to a jump in inflation and a hit to consumer spending.
Chart: World GDP forecast
Contributions to World GDP growth (y/y), %
6
5.1 5.2
5.0
4.9
5
4.7
4.6
3.7
4
3.5
3.0
2.6
3
Forecast
2.6
2.3
2.5
2.7
2.4
2.4
2.8
2
1
0
-1
-1.0
-2
-3
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
US
Europe
Japan
BRICS
Rest of emerging
World
Rest of advanced
Source: Thomson Datastream, Schroders Economics Group, February 2016 forecast. Please note the forecast warning at
the back of the document.
18
May 2016
For professional investors only
Schroders Baseline Forecast
Real GDP
y/y%
World
Advanced*
US
Eurozone
Germany
UK
Japan
Total Emerging**
BRICs
China
Wt (%)
100
62.4
24.7
19.0
5.5
4.2
6.5
37.6
23.6
14.7
2015
2.4
1.8
2.4
1.5
1.4
2.2
0.5
3.4
4.2
6.9
2016
2.4
1.7
2.1
1.4
1.6
1.9
0.8
3.6
4.4
6.3
Prev.
(2.6)
(1.9)
(2.4)
(1.5)
(1.7)
(1.9)
 (1.1)
 (3.9)
 (4.6)
(6.3)
Consensus 2017
Prev.
2.4
2.8
(2.8)
1.7
1.9
(1.9)
2.0
2.1
(2.1)
1.5
1.6
(1.6)
1.6
2.1
(2.1)
2.0
1.6
(1.6)
0.6
1.4  (1.5)
3.5
4.4  (4.2)
4.3
5.2
(5.2)
6.5
6.2
(6.2)
Consensus
2.8
1.9
2.4
1.7
1.5
2.2
0.5
4.3
5.1
6.3
Wt (%)
100
62.4
24.7
19.0
5.5
4.2
6.5
37.6
23.6
14.7
2015
3.0
0.2
0.1
0.0
0.1
0.1
0.8
7.6
4.5
1.5
2016
3.9
1.0
1.2
0.7
0.9
0.8
0.4
8.7
3.8
1.9
Prev.
(3.7)
(1.4)
(1.6)
(1.3)
(1.5)
(1.3)
(1.0)
(7.4)
(3.6)
(1.9)
Consensus 2017
Prev.
4.6
3.7  (3.9)
0.8
2.0  (1.9)
1.3
2.3  (2.1)
0.3
1.6
(1.6)
0.5
1.8  (1.6)
0.7
2.0  (2.2)
0.0
1.8
(1.8)
10.9
6.7  (7.3)
3.6
3.5  (3.4)
1.9
2.1
(2.1)
Consensus
3.6
1.8
2.2
1.4
1.6
1.7
1.6
6.6
3.3
1.9
Current
0.50
0.50
0.00
-0.40
-0.10
4.35
2015
0.50
0.50
0.05
-0.30
0.10
4.35
2016
Prev.
1.00  (1.25)
0.75  (1.00)
0.05
(0.05)
-0.50
-0.25  (0.10)
3.50
(3.50)
Current
4487
159
375
383
17.50
2015
4487
652
375
383
17.50
2016
Prev.
4505  (4507)
1372  (1369)
375
(375)
400  (404)
15.00
15.00
FX (Month of Dec)
Current
USD/GBP
1.46
USD/EUR
1.13
JPY/USD
108.6
GBP/EUR
0.78
RMB/USD
6.48
Commodities (over year)
Brent Crude
47.6
2015
1.47
1.09
120.3
0.74
6.49
2016
1.43
1.08
115
0.76
6.80





Prev.
(1.50)
(1.02)
(120)
(0.68)
(6.60)
Y/Y(%)
-3.0
-0.6
-4.4
2.5
4.7
2017
1.40
1.04
120
0.74
7.00





Prev.
(1.50)
(1.02)
(115)
(0.68)
(6.80)
Y/Y(%)
-2.1
-3.7
4.3
-1.6
2.9
52.7
35.7

(48)
-32.3
41.9

(43)
17.6





Inflation CPI
y/y%
World
Advanced*
US
Eurozone
Germany
UK
Japan
Total Emerging**
BRICs
China









Interest rates
% (Month of Dec)
US
UK
Eurozone (Refi)
Eurozone (Depo)
Japan
China
Market
0.86
0.67
-0.28
0.01
-
2017
1.50
1.00
0.05
-0.50
-0.50
3.00
Prev.
 (2.00)
 (1.25)
 (0.25)
Market
1.13
0.91
 (0.10)
(3.00)
0.01
-
0.91
Other monetary policy
(Over year or by Dec)
US QE ($Bn)
EZ QE (€Bn)
UK QE (£Bn)
JP QE (¥Tn)
China RRR (%)
2017
Prev.
4523  (4525)
1732  (1369)
375
(375)
400  (404)
13.00
13.00
Key variables
Source: Schroders, Thomson Datastream, Consensus Economics, April 2016
Consensus inflation numbers for Emerging Markets is for end of period, and is not directly comparable.
Market data as at 29/04/2016
Previous forecast refers to November 2015
* Advanced m arkets: Australia, Canada, Denmark, Euro area, Israel, Japan, New Zealand, Singapore, Sw eden, Sw itzerland,
United Kingdom, United States.
** Em erging m arkets: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela, China, India, Indonesia, Malaysia, Philippines,
South Korea, Taiw an, Thailand, South Africa, Russia, Czech Rep., Hungary, Poland, Romania, Turkey, Ukraine, Bulgaria,
Croatia, Latvia, Lithuania.
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May 2016
For professional investors only
Updated forecast charts – Consensus Economics
For the EM, EM Asia and Pacific ex Japan, growth and inflation forecasts are GDP weighted and
calculated using Consensus Economics forecasts of individual countries.
Chart A: GDP consensus forecasts
2016
2017
%
8
%
8
7
7
EM Asia
6
EM Asia
6
5
EM
5
EM
4
4
Pac ex Jap
US
3
Pac ex Jap
US
Eurozone
2
3
UK
2
1
UK
Eurozone
1
Japan
0
Jan-15
Japan
0
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jan
Feb
Mar
Apr
Chart B: Inflation consensus forecasts
2016
2017
%
6
%
6
EM
5
5
EM
4
4
3
3
Pac ex Jap
2
EM Asia
EM Asia
UK
US
1
2
Japan
0
Jan-15
US
Pac ex Jap
Eurozone
1
Eurozone
UK
Japan
0
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jan
Feb
Mar
Apr
Source: Consensus Economics (April 2016), Schroders.
Pacific ex. Japan: Australia, Hong Kong, New Zealand, Singapore.
Emerging Asia: China, India, Indonesia, Malaysia, Philippines, South Korea, Taiwan, Thailand.
Emerging markets: China, India, Indonesia, Malaysia, Philippines, South Korea, Taiwan, Thailand, Argentina, Brazil,
Colombia, Chile, Mexico, Peru, Venezuela, South Africa, Czech Republic, Hungary, Poland, Romania, Russia, Turkey,
Ukraine, Bulgaria, Croatia, Estonia, Latvia, Lithuania.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own
assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to
our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. The views and opinions contained herein
are those of Schroder Investments Management’s Economics team, and may not necessarily represent views expressed or reflected in other Schroders
communications, strategies or funds. This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument
described in this document. The information and opinions contained in this document have been obtained from sources we consider to be reliable. No
responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the
Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and
information in the document when taking individual investment and/or strategic decisions. For your security, communications may be taped or monitored.
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